Incentives for Early Adoption of Carbon Capture Technology

We analyze a policy proposal for regulating the next generation of baseload electricity generation facilities in the United States. The cornerstone of this regulation is a (hypothetical) EPA mandate for an emission standard of 80 kg of CO2 per MWh of electricity generated. The mandate would go into effect at the end of 2027 for all power generating facilities that come into operation after 2017. Fossil-fuel power plants could meet the standard by capturing between 80 and 90% of their current CO2 emissions. While the initial cost of complying with this standard is relatively high for first-of-a-kind facilities, learning effects are projected to reduce this cost substantially by the end of 2027, provided new facilities consistently adopt carbon capture technology in the intervening years. We identify a combination of investment — and production tax credits that provide the required incentives for new facilities to be willing to comply with the standard ahead of the mandate. Due to the anticipated learning effects, the incremental cost associated with the stricter emission limit is projected to about 1.2¢ per kWh of electricity in the long run.